Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30
and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two
alternative investment strategies, one in the stock and the other in an option on the stock (Tell me
exactly what you would do in each strategy and calculate the total profit for different stock prices.
How many shares/options you would buy/sell?)
Strategy 2 (option):
Stock price (ST) in the
$20
$25
$30
$32
$35
$40
$45
market
Option value (Pay off)
Premium
Profit from strategy 2
a) Would you buy or sell call options?
b) How many call options would you buy or sell?
c) How will you make money?

Transcribed Image Text:5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30
and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two
alternative investment strategies, one in the stock and the other in an option on the stock (Tell me
exactly what you would do in each strategy and calculate the total profit for different stock prices.
How many shares/options you would buy/sell?)
Strategy 1 (stock):
Stock price (ST) in the market
Profit from strategy 1
$25
$30
$32
$35
$40
$45
a) Would you buy or sell stocks?
b) How many stocks would you buy or sell?
c) How will you make money?
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